KCBOT Committee Proposes Change to Variable Storage Rates

September 17, 2010 Bookmark and Share

The Kansas City Board of Trade (KCBOT) said this week it will pursue an amendment to its wheat contract to allow for variable storage rates, or VSRs, similar to those instituted by the Chicago Board of Trade last year.

The proposal is an effort to address the lack of convergence between wheat futures prices and the cash prices received by farmers, which has been a serious problem in recent years.

The KCBOT announcement said their Wheat Contract Committee has considered several options to tackle this problem, ultimately voting to recommend the Board of Directors approve amendments that would allow for VSRs.

If the Committee’s recommendation is accepted the base storage rate would increase from 4.5 cents per bushel per month to 5.5 cents per bushel per month, and the Board would begin calculating a 30-business-day running average of the nearby spread relative to financial full carry.

At the end of the period in question, if the resulting average is 90 percent or more of full carry, the storage rate would increase by 3.5 cents per bushel per month; if the resulting average is between 50 and 70 percent of full carry, the storage rate would decrease by 3.5 cents per bushel, per month; and if the resulting average is 50 percent or less of full carry, the storage rate would decrease to the base. Any changes to the storage rate would become effective the first calendar day of the nearby contract delivery month.

The Committee will recommend the change become effective with the September 2011 contract month, pending Board approval, KCBOT membership approval and CFTC approval.

Neither NAWG nor Kansas Wheat has taken firm positions on variable storage rates, though the National Grain and Feed Association has been supportive. It is unclear if VSRs have positively affected convergence at the Chicago market, but NAWG and state association staff continue to monitor the situation and engage in wheat chain dialogue on this and other proposals to increase convergence.